You are absolutely right. Except for the fact that paint or bondo doesn't stick well to rust so it wouldn't seal the air out.

If you really could seal something perfectly and exclude all oxygen, then the oxidation reaction COULD NOT go on. However, it is really almost impossible to seal off the metal. For one thing, oxygen can diffuse through epoxy and paint and hence eventually react with metal to produce the oxide.
The rate of diffusion is enhanced in the presence of moisture. Essentially all materials are full of tiny (nanometer- sized) cracks and imperfections--sometimes called DEFECTS.Oxygen can exploit these defects and other vacancies at the atomic level.

You are basically correct in that rust is iron oxide, which is a reaction between oxygen and iron. The reaction can also be between water and iron, or other sources of oxygen. The main reason to remove the existing rust prior to painting, bondo-ing, etc. is that the rust only loosely adheres to the underlying metal, is very brittle, and does not have much mechanical strength. Hence, anything put over the rust will quickly crack, debond, peel, etc., allowing oxygen and/or water to continue forming more rust.

Your question is very apt, it does seem like covering rust will stop its growth. However, I must point out that rust actually requires oxygen, iron and water as a mediator. (Without water, the reaction is so slow, no rust would be visable for centuries.) Oxygen dissolves readily in water, so the key problem is to keep water (and the oxygen it carries) away from the iron surface. This sounds simple, but it is nearly impossible to prevent some wetting of the surface since the paint (or bondo epoxy) coating is porous. A good seal can be made to bright, clean iron or steel, but iron oxide is a weak, crumbly, and very porous material. Worse, iron oxide forms a number of hydrates, storing water and oxygen for further corrosion. So, even if a seal is achieved, the corrosion process can continue underneath it for a time. This usually leads to loss of the seal integrity and further corrosion. One might guess that some chemicals can be added to the rust to stop its growth and then the sealant can be applied. Phosphoric acid was used in ths way for many years, both as a rust remover (Naval jelly) and as a
preservative. However, it is diffiuclt to determine if the corrosion is stopped or only coated... Thus it is often easier to simply totally remove the rust to clean metal (which is easy to inspect) and then rebuild the desired shape or paint the surface.

Given this discussion, and your own investigations of corrosion, it might seem that iron ships are completely silly -- yet the oldest existing floating vessels (such as the Star of India, in San Diego) are iron hulled or iron plated. How can this be true? Why don't iron hulls rapidly rust away? Hint: you might look up galvinized and stainless steel for further insight.

As a post-thought, DeLorian cars made in the early seventies from stainless steel bodies are still rust free and are in high demand on the rebuilder circuit. Why do you think car companies might not want a car that lasts 30 years?